The rise of side hustles has transformed the way people earn. What once began as casual hobbies or extra cash through online marketplaces has grown into a diverse range of additional income streams.

From clearing out wardrobes on Vinted to building thriving Etsy shops, many people are turning their passions into profit. Side hustles can include everything from freelancing and tutoring to food delivery with apps like Uber Eats or selling handcrafted goods at local markets.

Research from GoDaddy reveals the average side hustler now earns an impressive £18,000 annually from their additional ventures. That might seem like a lot, but some side hustles can be particularly lucrative, thus notching that average figure up and up in recent years. 

However, these additional incomes haven’t escaped HMRC. January 2024 brought significant changes to tracking these earnings, with digital platforms like Vinted, eBay, and Airbnb now sharing seller information directly with HMRC. 

This made understanding your tax obligations more important than ever, with HMRC declaring they’d take action on side hustlers who think they can escape reporting their earnings. 

So, whether you’re selling handmade crafts or reselling vintage finds, knowing where you stand with tax isn’t just good practice anymore – it’s essential.

Let’s break down everything you need to know about staying tax-compliant with your online selling – from basic obligations to smart strategies for legitimate tax efficiency.

What counts as a side hustle?

Thousands of people are developing additional income streams alongside their main jobs. In HMRC’s eyes, a side hustle is quite simply an additional form of earnings that could be subject to tax.

Side hustles range from occasional earnings of a few hundred pounds to substantial second businesses turning over thousands each month. The most common include:

• Delivery and driving work through apps like Uber and Deliveroo
• Online selling through platforms like eBay, Etsy, and Vinted
• Freelance services such as writing, design, or programming
• Property rental via Airbnb or storage space letting
• Personal services including tutoring, cleaning, and pet care
• Social media and content creation
• Trading at markets or car boot sales
• Subscription products and services

While the term ‘side hustle’ is relatively new, it describes types of income that have existed for centuries. In essence, any money you earn outside traditional employment and not taxed at source may qualify as a side hustle and may need to be reported for tax purposes.

Setting up your side hustle to be compliant 

If you haven’t started your side hustle journey yet, or you’re thinking about turning your casual hobby into something more serious, getting the foundations right from day one will save you considerable stress later. 

Let’s walk through the essential setup steps that will keep you tax-efficient from the start.

Choosing your business structure

Most online sellers start as sole traders – it’s the simplest option and perfect for testing the waters. As a sole trader, you’re essentially self-employed, keeping all your profits after tax and maintaining complete control. 

Registration is straightforward through HMRC’s website, and you’ll only need to submit one tax return each year. However, if you’re planning to scale quickly or expect significant profits, a limited company might be worth considering. 

While it involves more paperwork and accounting responsibilities, it can offer better tax efficiency and legal protection as your business grows. The key benefits include:

• Limited liability protection for your personal assets
• More tax planning opportunities, especially once profits exceed £50,000
• Greater credibility with suppliers and customers
• Easier to sell or transfer ownership in the future

The decision often comes down to your immediate plans and long-term goals. Starting as a sole trader and transitioning to a limited company later is the most common choice – especially if you’re not employing people.

Setting up your systems

The next step is establishing proper record-keeping systems. Gone are the days of shoeboxes full of receipts – digital tools make tracking your income and expenses much simpler. At a minimum, you’ll need:

• A dedicated business bank account (even a separate personal account will do when starting)
• A simple system for tracking sales and expenses
• A method for storing receipts and invoices digitally
• A spreadsheet or basic accounting software for monthly reconciliation

Digital tools simplify record-keeping. Many online marketplaces provide integrated systems that automatically track your sales. When combined with accounting software, these give you clear visibility of your business performance and simplify tax reporting.

Popular tools for side hustle accounting include:

• QuickBooks for basic bookkeeping and tax calculations
• FreeAgent for freelancers and small businesses
• Xero for growing businesses

Most accounting software connects directly to your bank account and can import data from major selling platforms. 

Understanding your tax obligations

Making money from online selling can feel like a minefield when it comes to tax. Many sellers struggle with basic questions: When do I need to register? How much can I earn before paying tax? What exactly do I need to report?

Confusion is understandable. Tax rules for online selling sit at an intersection between casually decluttering your wardrobe and house and selling on eBay and Vinted (which usually isn’t taxable) and running a business or selling services or products in volumes (which definitely is). 

Since January 2024, this has become even more important. Digital platforms like eBay, Vinted, and Etsy must now report seller information directly to HMRC. 

If you make more than 30 sales in a year or earn over €2,000 (around £1,700), the platform will share your total income, number of sales, and personal details with the tax authority. 

That means if you don’t follow processes, HMRC may have enough information to follow up with you directly. And that could result in fines or penalties. 

Let’s explore how exactly tax for side hustles works. 

1. The £1,000 trading allowance

The first £1,000 you earn from trading in a tax year is tax-free under the Trading Allowance. This applies to your total trading income before expenses, not your profit. Once you exceed £1,000 in sales, you must tell HMRC about all your trading income – even if you’re making a loss.

For example, if you sell £1,200 worth of items but spend £300 on stock, you still need to register as self-employed because your total sales exceed £1,000. However, you’ll only pay tax on your £900 profit (if any tax is due).

If your side hustle involves property income, such as renting through Airbnb, the Property Allowance applies instead of the Trading Allowance. 

The first £1,000 of gross property income is tax-free. For income over £1,000, you must report all earnings and decide whether to claim the allowance or deduct actual expenses.

2. Self-employment registration timing and process

You must register as self-employed with HMRC if you earn over £1,000 in a tax year from a side hustle. Once your earnings exceed this threshold, the registration deadline is October 5th, following the end of the tax year in which you started trading.

For example, if you begin selling or trading in June 2024, this income falls into the 2024/25 tax year (6 April 2024, to 5 April 2025). In this case, you must register with HMRC as self-employed by 5 October 2025.

How to register as self-employed

The registration process is straightforward and can be completed online. Here’s what you need to do:

• Create a Government Gateway account: This is required to access HMRC’s online services.
• Register for self assessment and Class 2 NICs: Use HMRC’s online form to inform them of your self-employment status. This process also enrols you for Class 2 National Insurance Contributions (NICs), which are mandatory for self-employed individuals earning above the Small Profits Threshold (£6,725 for the 2024/25 tax year).
• Receive your Unique Taxpayer Reference (UTR): After registering, HMRC will send you a UTR, which you’ll need to file your self assessment tax return.

Self assessment obligations

Once registered, you’ll need to complete a self assessment tax return each year to report your income and expenses. The deadlines are:

• Paper returns: Due by 31 October following the end of the tax year.
• Online returns: Due by 31 January following the end of the tax year.

For example, for the 2024/25 tax year, your online return must be submitted by 31 January 2026.

What to include in your self assessment

You’ll need to report:

• Your total income from self-employment, including side hustle profits.
• Allowable expenses include equipment, travel costs, and other business-related deductions. More on this shortly. 
• Any other income, such as employment income, rental income, or savings interest, to ensure HMRC calculates the correct tax liability across all earnings.

Failing to a) register for self assessment on time, b) report the right income, or c) pay your bill on time can incur fines and penalties. More on this shortly. 

3. Understanding income tax and national insurance

When you’re self-employed alongside a regular job – often the case for side hustles – HMRC treats income from each source separately but considers your total earnings when calculating your tax.

However, National Insurance Contributions (NICs) are assessed separately for each income type. So:

• Employment income is taxed through the PAYE system, where your employer deducts income tax and Class 1 NICs directly from your salary.
• Side hustle income is managed through the self assessment system, where you pay income tax and additional NICs (Class 2 and Class 4) based on your profits.

Example

If you earn £30,000 from your regular job and make £10,000 in profit from your side hustle, HMRC considers your total income of £40,000 when determining your tax bands.

You will pay PAYE tax and Class 1 National Insurance Contributions (NICs) on your £30,000 salary, deducted automatically by your employer.

Through self assessment, you will pay income tax and NICs on your £10,000 profit. Since your profits exceed the Small Profits Threshold of £6,725 (2024/25 tax year), you will pay Class 2 NICs at a flat rate of £3.45 per week. 

However, as your profits are below the Lower Profits Limit of £12,570, Class 4 NICs will not apply.

Understanding tax payments

When paying your self assessment tax bill, HMRC may require a balancing payment and payments on account. 

These payments ensure your tax liability is covered for the previous and upcoming tax years.

• A balancing payment is the tax and National Insurance Contributions (NICs) you owe for the previous tax year. It is the difference between your total tax liability and any payments already made, such as through PAYE. For example, for income earned between 6 April 2023, and 5 April 2024, the balancing payment is due by 31 January 2025.
• Payments on account are advance payments toward your tax bill for the next tax year. These are required if your self assessment liability exceeds £1,000 after PAYE deductions. Each payment on account is calculated as 50% of your previous year’s tax bill.
• The first payment on account is due by 31 January alongside your balancing payment, and the second payment on account is due by 31 July.

Example

If your total tax liability for 2023/24 is £3,000:

• By 31 January 2025, you will need to pay £3,000 as the balancing payment for 2023/24 and £1,500 as the first payment on account for 2024/25. This brings your total January bill to £4,500.
• By 31 July 2025, you will need to pay £1,500 as the second payment on account for 2024/25.

Exceptions to payments on account

• Payments on account are not required if your tax bill is £1,000 or less after PAYE deductions.
• You can apply to reduce payments on account if you expect to earn less in the following year. However, if you reduce them too much and underpay, HMRC may charge interest.
• You paid more than 80% of the tax you owe for the year at source (for example, through your tax code or because your bank had already deducted interest on your savings).

Why January feels expensive

The 31 January deadline often feels high because it combines the balancing payment for the previous year and the first payment on account for the next year. Effectively, this means paying 1.5 years of tax in one go.

If you’re confused about self assessment, including when to register and what to do, the friendly team at Cottons can help. Discover more about our self assessment services here. 

VAT considerations

Value Added Tax (VAT) is another factor for side hustlers, particularly as their business grows. The VAT registration threshold is set at £90,000 of taxable turnover in any rolling 12-month period. You’ll need to monitor your earnings closely across this timeframe, not just within the tax year. 

Once your taxable turnover exceeds £90,000, you must register for VAT within 30 days. Being VAT-registered means:

• Charging VAT: You will need to add VAT (typically 20% in the UK) to the price of your goods or services. This increases your pricing for non-VAT-registered customers who cannot reclaim the VAT you charge.
• Submitting quarterly VAT returns: You must report your VAT on sales and purchases to HMRC every three months.
• Reclaiming VAT: You can recover VAT paid on eligible business expenses, which can offset the VAT you collect.

Some sellers choose to register voluntarily before reaching the threshold. This is often beneficial if:

• You sell primarily to VAT-registered businesses, as they can reclaim the VAT you charge.
• You incur significant expenses on which VAT can be reclaimed, such as stock, equipment, or software.
• You want to position your business as more established and professional in the eyes of suppliers and customers.

However, voluntary registration requires careful consideration, as it adds administrative responsibilities and may impact pricing for non-VAT-registered customers.

VAT can be complex. Reach out to Cottons if you think it’s likely to apply to your business soon, or if you’d like to learn whether registering voluntarily will offer you value. 

Understanding the risks of non-compliance 

HMRC now has broader access to information about side hustle income. They receive direct reports from digital platforms about seller earnings, and can examine various aspects of your financial activity. They have the power to look back several years if they suspect non-compliance and can issue formal information notices requiring you to provide documentation.

HMRC has a structured penalty system for non-compliance, designed to address issues like failing to notify taxable income, filing late, or paying taxes late. 

The severity of penalties depends on the nature of the issue, how quickly you address it, and whether the mistake was accidental or deliberate.

Missing deadlines

These are by far the most common penalties you’ll encounter. Failing to file your self assessment tax return or pay your tax bill on time results in automatic penalties, which escalate over time:

• A £100 penalty applies immediately after the filing deadline is missed, even if no tax is owed.
• Daily penalties of £10 per day apply after three months, up to a maximum of £900.
• An additional penalty of 5% of unpaid tax is charged if the return is six months late.
• A further 5% penalty of unpaid tax is charged if the return is twelve months late.

In addition to these penalties, HMRC charges interest on all outstanding amounts from the payment deadline until the balance is cleared. The interest rate is typically the Bank of England base rate plus 2.5%.

Failure to notify HMRC

If you fail to inform HMRC of taxable income – such as not registering as self-employed or failing to report side hustle earnings over £1,000 – penalties are calculated as a percentage of the Potential Lost Revenue (PLR) (i.e., the tax HMRC would have lost if the issue was not corrected). 

The penalties vary depending on behaviour:

• Careless mistakes: Up to 30% of the unpaid tax. This applies when reasonable care has not been taken to meet obligations.
• Deliberate but undisclosed errors: Up to 70% of the unpaid tax. This applies when taxable income is knowingly unreported but without active concealment.
• Deliberate and concealed errors: Up to 100% of the unpaid tax. This is reserved for cases where income is deliberately hidden from HMRC.

HMRC’s approach to compliance

While HMRC enforces penalties for non-compliance, they often take a lenient approach to individuals who make genuine mistakes and demonstrate that they have taken reasonable care to comply. This includes:

• Promptly correcting errors: Taking immediate steps to resolve issues when they are identified.
• Maintaining accurate records: Keeping detailed records of all income and expenses to support tax submissions.
• Proactively communicating with HMRC: Informing HMRC of potential errors or issues before they discover them.

Deliberate attempts to avoid tax obligations are treated far more seriously.

Maximising your side hustle’s tax efficiency

For online sellers, understanding tax efficiency isn’t about clever accounting – it’s about knowing what you can legitimately claim and when. 

Getting this right means more money in your pocket without stepping into risky territory.

Understanding your allowable expenses

The foundation of tax efficiency is knowing what expenses reduce your taxable profit. HMRC’s rule is clear: costs must be ‘wholly and exclusively’ for business purposes. For online sellers, this opens up more opportunities than many realise.

Platform and selling fees come first – but many sellers don’t claim everything they can. Every marketplace commission, PayPal fee, promoted listing cost, and subscription fee is deductible. 

On platforms like eBay, where fees can reach 12.8% plus various extras, tracking these carefully makes a substantial difference to your tax bill.

Packaging and postage often form your next biggest expense. This includes:

• Boxes, bubble wrap, and tape
• Shipping labels and printer supplies
• Protective materials like void fill
• Return postage costs
• Collection service fees
• Delivery insurance

Stock costs extend beyond the obvious purchase price. You can claim for:

• Sample products for testing or photography
• Storage containers and organisation systems
• Stock management software
• Wastage and damaged items
• Market research purchases
• Supplier delivery charges

Working from home brings valuable deductions too. HMRC’s simplified rates let you claim £10-£30 monthly based on hours worked, but calculating actual usage often saves more. You can claim portions of:

• Mortgage interest or rent
• Council tax
• Utilities (gas, electricity, water)
• Internet and phone costs
• Home insurance
• Repairs and maintenance
• Cleaning costs

Equipment and business growth

Investing in your business? That new laptop for managing orders, camera for product shots, or shelf system for stock storage isn’t just a business necessity – it’s (usually) tax deductible. 

The Annual Investment Allowance means you can deduct most equipment costs immediately rather than spreading them over years. Common equipment claims include:

• Computers and tablets
• Smartphones for business use
• Photography equipment
• Storage solutions
• Packing stations
• Label printers
• Security systems

Always check to ensure your investments are a) classified as tax deductible and b) how much you can claim. For example, if the equipment is used partly for personal purposes, you may only claim the portion related to business use. 

Clear and accurate records are essential to substantiate your claims if HMRC raises questions.

Take control of your tax affairs with Cottons

Running a side hustle can be exciting, but it also comes with unique challenges – including when it comes to tax! While this guide covers the essentials, every side hustle is different, and tax rules are always changing. That’s why having expert support can make all the difference.

At Cottons, we specialise in simplifying tax for side hustlers. Whether you’re balancing self assessment registration, tracking business expenses alongside a full-time job, or comprehending VAT thresholds, we understand your challenges.

We can help you set up efficient systems, claim every legitimate deduction, and stay ahead of deadlines so you can focus on growing your side hustle stress-free.

Don’t let tax hold your side hustle back. Book a consultation with Cottons today, and let’s ensure your side hustle stays tax-efficient and fully compliant.